==Phrack Inc.==
Volume One, Issue Four, Phile #7 of 11
Centrex Renaissance
"The Regulations"
By Leslie Albin * (See Note)
From: On Communications
(October 1985, Vol. 2,No. 10)
By Jester Sluggo
Regulatory changes across the country have made new bargain
available to telecommunications users. Centrex -- the homely old
central office service AT&T planned to bury only a couple of
years ago -- has been regroomed, revitalized and often
rebaptized.
As Centrex, Centron, Caroline or Essx -- the various
regional trade names of Centrex service -- it is cheaper and more
powerful than ever in mosy parts of the country.
The bargain will only get better in regions where the Bell
operating companies (BOC) have seized on Centrex not only as a
logical step in their progression toward an integrated services
digital network, but also as a key to the lucrative
telecommunications aftermarket -- as long as those regulatory
changes do not shift.
The Centrex service the regional BOC's were left with after
divestiture was deliberately undernourished, as part of AT&T's
migration strategy to bolster sales of Western Electric private
branch exchanges. Centrex was lacking in technology and
marketing innovation, and users were abandoning it.
But, in a little more than a year and a half, the RBOC's
(Regional Bell Operating Companies) have managed to win over
state regulators to the idea of a thriving Centrex, gaining their
approval of trunk equivalency rates, innovative tariffs, rate
stabilization plans, actual detariffing and -- in one case --
complete deregulation.
At the federal level, challenges to this revitalization have
been rebuffed or have stalled before the FCC, and the RBOCs are
pitching for greater leeway in providing the customer premises
equipment to go with their Centrex service.
"The regulators have been bending over backward to give
Centrex every competitive advantage," said Albert Angel, a lawyer
with the Washing D.C. firm of Wood, Lucksinger & Epstein, which
represents the North American Telecommunications Association
(NATA).
"Ultimately, there will be a clear finding that the
preferential treatment of Centrex is not justified," added Angel,
and should that happen, Centrex customers -- even those with
price stability packages -- could find themselves committed to a
service beset by escalating rates.
Most of the federal issues involving Centrex regulation
developed as a response to actions taken in the states. For
instance, NATA has sternly objected to "trunk equivalency" rates
authorized by a number of state commissions.
The concept evolved when the FCC imposed its $6 monthly
customer access line charge on new Centrex lines along with
regular business lines. Because Centrex uses lines much less
efficiently than a PBX does, "the net impact is very different on
a Centrex subscriber than it is on a PBX subscriber," said Greg
Laken, division manager of Centrex and central office services
for Bell Atlantic Corp. Centrex requires one twisted pair for
each station, whereas a PBX requires one trunk for six or seven
stations.
Trying to keep Centrex viable with a built-in customer
access line charge burden six to seven times greater than that
incurred by a comparable PBX would have been a tough proposition.
Bell Atlantic's BOCs, like virtually every other BOC in the
country, won permission from state regulators to offset the
higher line charges for Centrex so that customers would pay at
the same level as owners of similarly sized PBXs.
To NATA, this amounts to nothing more than "taxing all
other customers for the benefit of Centrex customers," NATA
attorney Angel said. But the FCC decided in summer 1985 that the
trunk equivalency rates do not undermine its access charge
policy. and the lower rates for Centrex users remain in effect.
Beyond whittling down customer access line charges, a number
of BOCs have had fresh Centrex tariffs approved by state
commissions that chop the service's rates and offer innovative
pricing schemes. Bell Atlantic's BOCs, for instance, have won
approval for tariffs cutting Centrex rates 30% to 35%. "The net
effect," said Lakin, "is that it is a very price-competitive
entry."
To NATA, the service's price competitiveness arises from
the BOCs' continuing monopoly position in the local market,
although BOC officials state firmly that Centrex is not priced
below cost and, in fact, generates revenue to subsidize other
services.
According to Angel, a Washington, D.C. residential customer
pays a cost-justified rate of between $15 and $17 for the local
loop and central office switching capability. A Centrex customer
using an identical local loop connected to the same central
office pays only $12. Many of the new tariffs being filed by the
BOCs recognize two of Centrex's traditional headaches:
instability and distance sensitivity.
Now many of the new tariffs offer users price guarantees and
incentives for signing the long-term contracts that give
telephone companies some stability in their Centrex base.
By locking in rates and either capping the associated costs
or typing their increase to the Department of Labor's cost-of-
living index, BOCs have been able to offer customers much of the
same predictability that a PBX does. Most tariffs give customers
the choice of three-, five- or seven-year contracts, the
incentives rising with the length of the agreement.
Centrex customers in the Chicago Loop area, for instance,
were paying a $12.52 per-line monthly charge if their system used
250 lines. Under a tariff approved last fall, however, those
customers saw the monthly charge drop to $10.94 and could drive
it down even further by signaling long-term contracts: $10.09
per-line under a three-year agreement, $9.84 under a five-year
agreement and $9.54 under a seven-year agreement.
"Slightly less than half of our 400,000-line total base has
gone on contract," said Lee Armagost, Illinois Bell's division
manager for tariffs and costs. And the concepts success is
continuing."
For all of the BOCs' success in winning lower Centrex rates,
some companies have fared even better -- they have convinced
state regulators to detariff Centrex service for new customers
and, in one case, to deregulate it entirely.
Northwestern Bell seems to be the current detariffing and
deregulating champion among the BOCs, having won approval for
detariffed Centron service in all of its states except Iowa.
Iowa simply deregulated it.
While detariffing allows the BOCs more freedom to negotiate
with large Centron customers, deregulating takes Centron
assets, expenses and revenues right out of the rate base and
removes the service from the regulators purview.
According to Tom Smith, vice-president and chief executive
officer of Northwestern Bell Iowa, the company's first move
toward deregulation occurred in 1983, when the Iowa State
Legislature passed a Bell-inspired bill that called for
competitive services to be deregulated. The following year,
Northwestern Bell succeeded in getting in getting more
legislation passed that declared Centron ready for detariffing
because of its competitive nature.
After reviewing the legislature's actions, the State
Commerce Commission decided that if the lawmakers were convinced
Centrex was competitive and services were to be deregulated, it
would skip over the detariffing of Centrex and simply deregulate
it, Smith said.
What followed was what Smith called "nine months of
intensive work," as regulators, company officials and consultants
from Anderson & Co. sorted out the procedures for carving Centrex
away from the rate base and set up safeguards against cross-
subsidies.
"A central office is not something that has this little
compartment that says 'for service A' and that little compartment
that says 'for service B'" Smith said of the accounting problem.
NATA agrees with that description and, according to NATA
attorney Angel, argues that because competitive Centrex services
must operate commingled with regulated facilities, the FCC should
halt the detariffing and deregulating of the service or order it
to be sequestered in a separate subsidiary with other competitive
products.
But the FCC has not acted on NATA's complaint. Meanwhile,
the first customer has signed up for Iowa's deregulated Centron
-- the state of Iowa itself.
The state had solicited bids to replace its Capitol Hill
complex's Centrex service in Des Moines when deregulated Centron
became available. The new rates negotiated by Northwestern Bell
and the state's staff produced a savings of about $1 million for
the state over the three-year life of the contract, according to
Glen Anderson Jr., director of state communications for Iowa.
While Anderson called the deregulated Centron service prices
"a dramatic savings," he also pointed out another incentive for
signing up.
"The other factor was political," he said. "We did not have
an appropriation to proceed with the procurement of a switch."
When the Centron agreement runs out, the state will be in
the market for a PBX again. A member of Anderson's staff said
the staff remains convinced it can enhance its own program with
its own switch.
At some BOCs, the once feature-poor Centrex has caught up
with PBXs in many respects. Where telephone companies are
pushing digital capabilities onto their networks, they are also
pushing digital capabilities onto Centrex. Pacific Bell, for
instance, can offer fully digital Centrex service from many of
its metropolitan central offices.
A number of BOCs concur with Bell Atlantic's position that
digital Centrex is a natural rung on the ladder to an ISDN --
among them Pacific Bell and New York Telephone Co. Many are
upgrading Centrex service with PBX-like features short of fully
digital service, including several versions call forwarding, call
waiting and speed dialing. Given the current strictures in the
FCC's Second Computer Inquiry and the Modified Final Judgement,
the expanded features list was bound to be called into question.
NATA, which has been leading the charge against the changes
in Centrex service, is fighting its battle on four fronts at the
FCC:
1) Last fall, it asked the FCC either to halt the
detariffing and deregulation of Centrex by the states or order a
separation of commingled facilities. The FCC has not acted on
the complaint.
2) Soon after filing that complaint, NATA filed another --
this one questioning the provision of competitive, enhanced
features by a regulated, basic telephone company. The FCC acted
on that complaint last summer, deciding that features such as
speed dialing, call forwarding and customer station changes are
adjuncts to basic service and can be offered by a regulated
telephone company under Computer II. Only customer-dialed
account recording was found to be and enhanced service, but the
BOCs can request waivers to continue offering it.
Until the waiver requests are considered, the FCC has
granted immediate, temporary waivers so the BOCs can continue
providing customer-dialed account recording to existing customers
-- including the U.S. Army. Meanwhile, the BOCs and NATA are
seeking reconsideration of the FCC's decision in petitions the
FCC will address this month or next, according to the FCC staff
member handling the issue.
3) Late last year, NATA asked the FCC to to stop Ameritech
and Nynex Corp. equipment subsidiaries from selling basic phone
services, including Centrex, through their unregulated customer
premises equipment subsidiaries.
When the FCC agreed to permit the joint marketing, it did so
with the provision that non-Bell companies would also be signed
up as sales agents for the basic services. As evidence of the
problem, NATA pointed to the sparse number of non-Bell sales
agents being signed up and the revenue moving from the BOCs to
their sister customer premises equipment subsidiaries in the form
of sales commissions. The FCC has not acted on the complaint or
NATA's original petition seeking a reversal of the sales agent
decision.
Bell Atlantic, backed by the majority of RBOCs, is seeking
FCC permission for an inverted version of the sales agent
decision that would let Bell Atlantic serve as sales agent for
another vendor's customer premises equipment when submitting
Centrex bids.
4) In July 1985, NATA filed an even more sweeping
complaint, a Centrex pricing action that argues that the BOCs
are using their monopoly power to favor Centrex over other
customers and to the detriment of PBX suppliers.
The complaint bridges a number of issues, including trunk
equivalency rates, pricing below cost and Computer II concerns.
The BOCs argued that Centrex is a state concern and, although the
FCC has preempted state jurisdiction in other matters, the FCC
paused to consider the jurisdictional question -- a pause that
could last six months or extend "indefinitely," according to
lawyers working on the matter.
NATA attorneys do not seem daunted by the chilly reception
they've gotten at the FCC, apparently expecting the temperature
to rise as regulators worry less about the viability of the
divested BOCs and begin to examine the economics of Centrex.
"All rates apart from Centrex are rising dramatically.
Centrex rates are decreasing," NATA attorney Angel said. "The
BOCs would have you believe that Centrex provides a subsidy to
other services. But, in fact, documented studies show just the
opposite, that Centrex derives a subsidy."
If Centrex is priced below cost, why are the BOCs so
delighted with it? According to Angel, the answer lies in the
financial structure of a regulated utility. "Centrex uses many
more loops than necessary. This leads to new construction
budgets, which lead to new investment, which leads to a rate of
return for the investors." Investors, Angel added, "make make
money by putting loop and plant all over the place."
NATA's objections to the recent changes in Centrex rates and
services, objections that do not extend to opposition to
traditional Centrex, have generally been characterized by BOC
officials and regulators as protectionist actions taken by a PBX
industry that did not really want the full competitive
environment for which it clamored.
"NATA is frequently described as the whiner in the corner,
as though it holds all the cards," Angel said. The seven RBOCs
are far better financed, he added, yet, "they have been
successful in painting themselves as the underdogs."
* Note: Leslie Albin is a freelance writer based in Chevy Chase,
Maryland.
Watch for Part 1 of Centrex Renaissance: "The Technology".
Written by John D. Bray.
The above text was written primarily for people in marketing
telephone technologies. In the interest of the phreaking world,
I hope that you can focus on the business side of
telecommunications which may be in your future. There are more
to PBX's than 0-700-456-1001. Any comments, questions, or
corrections can be e-mailed to me at Metal Shop Private, or to:
J. Sluggo
P.O. Box 93
East Grand Forks, MN 56721
This file is dedicated to Bambi for bringing me my fondest
memories -- There is "No One Like You!" -- The Scorpions.
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/ luggo !!